Sterling has taken a hit in the last few days dropping 2% the biggest daily fall this year. The economy grew quarter on quarter by 5.5%, but now fuel shortages, energy supplies, future taxes increases, escalating prices and the end of Furlough drag on the pound. The solution perhaps is to increase interest rates, but this will add to the cost of UK Government debt servicing, which would not be good news.

The news from the US of increasing inflation and soaring Covid cases, combined with limited further economic stimulation and low consumer confidence is allowing the US dollar to weaken against other currencies. In Europe inflation is also on the increase with problems in the blocks two major economies. In France inflation is above the blocks target rate and in Germany, factories are operating below pre-Covid levels, with car manufacturing particularly badly hit. Germany also has a political transformation coming with the end of the Merkel era within the month. The new chancellor will have to manage a surge in inflation combined with a drop off of demand and decide if this is simply a delay in demand or business lost.

The steady strengthening of the US dollar came to an end this week and gains were largely reversed as data from the US indicated growth was slower than expected, jobless figures continued higher than expected. The Fed’s decision not to ease their asset purchase scheme also bore on the dollar. The pound is supported by positive Covid news and Brexit news/performance, against the Euro which is currently concerned about the inflation rate for the remainder of 2021.

The supply chain challenges continue to be the major factor influencing things. Freight rates are still climbing, congestion and container supply issues are spreading over to South/Central America now and all supply chains are lengthening. It is a precarious situation, and ultimately increasing costs significantly. We do not expect the situation to improve before 2022. As an indicator, freight from China has increased over 1000% in six months, from $1000/fcl to $ 12000. This adds $ 500/mt for products from this region.

The pound has performed well over the last month mainly riding on the success of the vaccine program and a series of economic data which predicts the UK economy will recover faster and stronger than previously anticipated. Eyes are turning to inflation now, partly as a consequence of the over heated property market, but also due to the increasing cost to all supply chains of freight and other issues. This factor is an impact in EU & USA economies too. Whether the effect in transitory or permanent will impact WHAT, IF Any action, is taken.

The Euro has out performed both Sterling and the US Dollar in the past month, and as vaccine delivery appears to be improving across the region, there is the return of some optimism. In the UK, Sterling has been more stable than the turmoil in the pre-Brexit years. The next weeks elections might introduce some volatility, particularly if the Scottish nationalists perform well and it increases pressure on another referendum for independence. Output figures, strong financial support and an accelerating vaccination program is supporting the US$, but growth prospects are also increasing globally, and in the Eurozone in particular, which cancels out some US Dollar support.

Two major considerations for thew FX markets currently apart from the problematic roll out of vaccinations around the globe. Firstly, increased tensions between Ukraine & Russia, with troop build ups and an escalation of the risk by USA authorities. This has largely gone unnoticed in these current times. Secondly the US has unveiled its economic recovery plan, which is going to focus on economic stimulus for national infrastructure and an ‘onshoring’ of jobs in the manufacturing sectors. Sterling is reacting positively to the planned lifting of restrictions over the coming two months, whilst the Euro is struggling as it sorts out the issues.

Joe Biden’s US Dollar stimulus package scraped through the house with an extremely narrow margin, potentially opening the way for a US$ 1400 cheque for all individuals as disposable income. The oil price reacted positively to the hope of this stimulus. But whether the senate approve the package is still ‘in the balance’, but US$ strength would follow. Within the Eurozone continued selling of sovereign bonds and subsequent buying by the Central bank to support the Euro is not stopping a gradual slide in its strength. The rise of further Covid variants in this region is also causing concern and undermining Euro strength. In the UK all eyes are on the budget; extent of stimulus package, tax increases and support payments. The current trend is for sterling weakness, but this could change fast.

Currently weakness in the US$ is evident with Sterling and the Euro both holding up against this currency. Sterling is thus holding against the Euro too, which is probably actually masking true weakness in the pound due to the two obvious factors of ‘new variant’ COVID and subsequent lockdown 3 and economic consequences, plus the economic consequences of Brexit. Will this lead to a double dip recession? It has to be likely. This will be true for the EU too we fear. The US is genuinely concerned about the slowness of recovery and the fact that employment levels are unlikely to recover to pre-COVID levels until 2024 at the earliest. They are pushing for further stimulus packages to support the economy.